Options for Financing the Business Sale
Business sales are rarely completed without some type of financing. Therefore, you’ll need to know where the buyer is going to get the money to purchase your business. Generally, the money will come from either third-party financing or seller-financing or a combination. It is important to know what you are getting into if you finance any part of the sale.
Seller financing is involved in up to 90 percent of small business sales and more than half of mid-size sales. If you’re not willing to finance at least some of the price, you may not be able to sell your company. The other option is for the buyer to obtain third-party financing. If the buyer is planning to obtain outside funding, the bank or other lender should confirm to you that the buyer is qualified and that the lender is willing to come up with the money before negotiations go too far.
Using Outside Lenders to Finance the Sale
When an outside lender such as a bank or investment firm finances the purchase of a business, the transaction is frequently called a leveraged buy out or LBO. LBOs were once very common, but many lenders have been stung as buyers tended to default when things got tough, or had such difficulty making payments that lenders were forced to restructure the loans. Lending criteria are stricter, now, and buyers are expected to put up more of their own money (or find a partner who’s willing to).
In the small business context, the typical LBO buyer is one or more of your managers or key employees who wants to take over after you retire. It may also be a combination of managers and other investors. In some cases it may be your children, or a group of them. Having an outside lender finance the transition of your family business to the next generation is a good way to transfer some of the risk outside your family, if you find an institutional lender who’s willing to participate. Institutional lenders are more likely to approve loans where the buyers already have experience in the particular business, so there will be a measure of management continuity.
LBO Financing Usually Includes Loans, Equity Interest
LBO financing is usually a package that combines several types of loans, as well as equity. The components may even come from different sources. The package itself may be put together by a bank, a commercial finance company, a venture capital firm, or a mergers and acquisitions intermediary that has access to capital markets.
Some typical components of the package might be 15 to 25 percent equity, 10 to 50 percent subordinated debt; and 40 to 70 percent senior debt. “Equity” would usually be in the form of common or preferred stock, held by the buyer or by other investors such as venture capitalists. “Senior debt” would be loans on assets such as receivables and inventory (for asset-based financing) or real estate and equipment (for more conventional financing). The senior debt holder is a secured lender who stands in first position to collect against the particular asset, if the buyer defaults.
In contrast, “subordinated debt,” also called mezzanine debt, is akin to a second mortgage in that if the buyer defaults, the debt holder would collect only after the senior debtors had been paid off. Consequently, the subordinate lenders frequently want a higher interest rate and an equity interest in the business as well, so there is a potentially greater reward in exchange for the greater risk they take in making the loan.
As you can guess, the complexity of the structure and the players involved make a typical LBO an unlikely prospect for the average small business, unless you’re in an industry that’s considered “sexy” at that moment in time. However, if you are willing to act as the subordinate debt holder, the LBO model can work for even a very small business. The determining factor would be whether the business has sufficient assets and cash flow to interest one or more institutional lenders in making the senior loan(s).
The buyer may have lined up a bank to do the primary financing on the deal, and may want you to take back subordinated debt for the remainder of the price, in a variation of a leveraged buy out (LBO). In that case, you are second in line if the buyer defaults on the primary loan.
Obviously, this is not as desirable a position for you, and if you agree to it you should demand a higher interest rate. You should also think about continuing to maintain an equity position in the company, so that you have a voice (even if not the controlling voice) in the management of the company.
If your buyer wants to do an LBO, recognize that it will require a lot of work on your part to make it happen. These deals are neither simple nor easy, and they take time to put together. Not only will you need to cooperate with the lender, you may even need to help sell the lender on the deal. However, the result can be significantly less risk to you than if you had financed the entire purchase yourself.
When Should You Consider Seller Financing?
Should you finance a buyer who is purchasing your business? There are pros and cons to seller financing. On the downside, if you allow the buyer to pay you off slowly over time, you’ll retain many of the risks that come from continued ownership of the business while giving up control of its management.
In most cases, the buyer’s ability to make the payments will depend on the future success of the business, yet your buyer may know little about your company, your customers, or even your industry. The buyer can mismanage your company down to nothing very quickly, if you don’t keep an eye on him. If the buyer runs aground and stops making payments, your only real recourse may be to foreclose on the note and repossess the business, but that means you’ll have to find another buyer and start all over again.
On the upside, carrying back a note for some or all of the purchase price may be the only way to sell the business, since banks have fairly strict lending criteria for acquisition loans. Moreover, seller financing can provide a tax break for you if you qualify for installment sale treatment. For the buyer, seller financing can be a godsend because you’ll generally have more relaxed qualification standards and more lenient terms than a bank would have.
Seller Financing Can Take Variety of Forms
The simplest way to provide seller financing is to have the buyer make a down payment, with you taking a note or mortgage for the rest of the purchase price. The business itself, and/or the significant business assets, provides the primary collateral for the note. A lien on the property is filed with the secretary of state’s office, so the world at large knows that it exists. If the buyer defaults on the note, you’ll be the first in line to step back in and take over the business.
In addition to its simplicity, this type of deal can be very flexible — you can adjust the payment schedule, interest rate, loan period, or any other terms to reflect your needs and the buyer’s financial situation. For example, you can provide for a floating interest rate, or one that starts low but goes up gradually over time.
Most seller financing will be for a relatively short term (say, five to seven years) but will be amortized over a much longer payment schedule, so that at the end of the loan term there’s still a large portion of principal remaining. The buyer will have to obtain outside financing to pay off the balance of the loan in a “balloon” payment at the end of the loan period. The idea is that at that point, the business will be on a solid footing and bank financing will be easier to find.
Make Sure to Protect Your Interests
If you agree to finance part of the deal, you should try to get the buyer to provide more security for the loan, besides the business itself. For example, you might require the buyer to put up a personal residence as additional collateral (assuming there is significant equity in the home.) Some buyers have other commercial real estate, or investments that can provide more security.
You can also require the buyer to personally guarantee the loan, just as a commercial lender would. And, of course, you’ll want to thoroughly check out the buyer’s background, including credit record, management experience, personal assets, and character, just as the buyer will check you out during the due diligence phase of negotiations.
In order to further protect yourself, you should require the buyer to take out a life insurance policy with yourself as beneficiary, so that the loan will be paid off if the buyer meets an untimely demise. If the buyer will be actively working in the business, you might also consider requiring disability insurance on the buyer, although sometimes this is prohibitively expensive.
Your sales contract may also restrict the new owner’s sale of assets, acquisitions, and expansions until the note is paid off, and may specify that you get to see the quarterly financial statements so you can keep tabs on the business.
Instead of financing per se, particularly if you’re being asked to put up secondary financing to a bank’s acquisition loan, you might be able to have the buyer purchase an annuity contract for you, or purchase some zero-coupon bonds. These are sold at a deep discount off of their future value. With this approach, the buyer gets the benefit of a lower payment now, but you won’t be so dependent on his or her future success. This plan works best in the situation where you suspect that you have a well-qualified buyer who could actually pay cash for the business, but simply doesn’t want to tie up all his funds there.
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Starting a Business: Finding Small Business Financing
While many new small businesses are financed out of their owners pockets, many others need an infusion of funds from other sources to get off the ground. This page presents the main small business financing options for financing a new business in Canada.
The Most Common Sources of Small Business Financing
You ve already guessed; most new small businesses are self-funded. The next most common sources of startup business financing are family and friends.
Read more about these and other options for financing a new business in 8 Sources of Business Start Up Money.
Learning the Small Business Financing Lingo: Debt vs. Equity Financing
The money you put into financing your new business is an example of equity financing. Stockholders are another example of this kind of financing.
Debt financing, on the other hand, is basically money that you borrow.
Finding Small Business Financing explains more about the difference between the two and the different types of debt and equity financing available.
If you are seeking debt financing, you ll likely find that you will be expected to provide equity financing as well. How much equity financing you can provide in relationship to how much money you’re trying to borrow is the basis of the debt-to-equity ratio (also known as leverage), an important consideration for any potential lender.
Small Business Grants
Small business grants are not a viable option for start up business financing for most small businesses in Canada.
The Truth About Small Business Grants in Canada explains why – and presents specific information on some of the small business grants available to small businesses.
If you are thinking about using grants as small business financing, you should read 5 Tips for Finding Small Business Grants in Canada to make your search easier.
Then browse through the Small Business Grants section of this Web site to get started; it lists more specific small business grants that eligible businesses might apply for.
Small Business Loans in Canada
Most small businesses that aren t self-financed or financed by family and/or friends are financed through small business loans.
Small business loans can be a particularly attractive small business financing option for financing a new business because the federal government sponsors programs that make funding start-up businesses a priority. You ll find details on (and links to) programs such as the Canada Small Business Loans Financing Program, the Business Development Bank of Canada s Start-up Financing and the Canadian Youth Business Foundation Loans Program in this site s Small Business Loans section.
If you are a woman starting a business (and more women are starting their own businesses all the time), you’ll definitely want to read Small Business Loans for Women in Canada, which presents small business loan programs that only Canadian women are eligible for.
When you think about getting a small business loan, the names of traditional banks and credit unions probably pop into your head.
But they re not the only lenders out there. What About a Private Lender? presents another source of small business financing that you may want to look into.
No matter what lender you’re dealing with, though, there are things that you can do to make your loan proposal more attractive. Read How to Get a Small Business Loan to learn how to increase your chances of getting the start up business financing you re looking for.
Angel investors are another source of small business financing that is worth investigating for many small businesses. Does your new small business have the potential for a solid return? Then angel investors might be interested in providing start up business financing.
Find out more about what angel investors look for when choosing businesses to fund in Attracting Angel Investors.
Then read How to Find an Angel Investor for tips on finding angel investors for your business.
For more information on financing your business, browse the Small Business Financing section of this Web site.
Happy Veterans Day! At TMC, we support veterans and their small business goals all year long. It is important to us to say thank YOU, today and everyday. # smallbusiness # veteransday
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The 2017 Bay Area Urban Manufacturing Summit 2017 was a success! Such a great time highlighting and celebrating the strength, diversity, and versatility of manufacturing in the Bay Area. Thank you to SFMade.org for hosting and to all who participated.
If you are curious about where the money from your SBA 504 loan comes from, we are going to answer all your questions now. Do you think you are borrowing money from the government? Guess again!
What Is An SBA 504 Debenture?
Buying commercial real estate, expanding your business—it’s an exciting time with lots to do and lots to think about. Here are some of the essential things to check to make sure it all goes right, and some of the ways that your CDC can help you with that process.
Commercial Real Estate Purchase Checklist: Five Things to Ask About Before Buying
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Thank you to everyone who came out to our Annual Lender Appreciation Celebration and thank you to our partners who were unable to make it! We appreciate every one of you.
Government Small Business Loans
Government small business loans help put your own business within reach. First there’s the quest for a decent location, then comes building a customer base, followed by all the initial hiccups of generating a cash flow before your business grows roots and gains momentum. The beginning of a business is crucial because it’s when you gain or lose market credibility. If you disappoint your customers, they may not give you a second chance. If your business gets off to a rocky start (most do), and you believe you can recover but need further financing to make this happen, you can apply for government small business loans.
For-profit lenders are reluctant to issue loans to anyone who does not have a strong credit report and financial history. That is not the case with government small business loans. Obviously, a decent credit report is important, and you will have to follow the guidelines regarding the repayment period and the interest rate set by the government, but usually the interest rates charged by government loans are lower than those you could expect in the private sector.
More about Government Small Business Loans
Government loans are typically offered through banks and credit unions that partner with the Small Business Administration (SBA). The SBA is a U.S. government body, with the motive of providing support for small businesses and entrepreneurs. For each loan authorized, a government-backed guarantee offers serious credibility, since the lender knows that even if you default, the government will pay off the balance. These loans can be applied to a number of uses, such as:
- Purchase of new equipment, machinery, parts, supplies, etc.
- Financing leasehold improvements
- Commercial mortgage on buildings
- Refinance existing debt
- Establishing a line of credit
Government small business loans benefit both small businesses and the lending agency. For small businesses, it is beneficial because this is money capital they may not have access too. For banks, the loan’s risk is decreased due to the loan being backed by the SBA.
Different SBA Government Loans
The SBA extends financial help through various lending programs it has to offer. Some of the more popular loans are:
- 7(a) Loan Guarantee Program: aimed primarily in helping a small business start or expand its services. The maximum size of such a loan is $5 million.
- MicroLoan Program: mostly used for short-term purposes, such as purchase of goods, office furniture, transportation, computers, etc. The maximum amount is fixed at $50,000.
- 504 Fixed Asset Program: featuring fixed-rate and long-term financing, these loans are aimed at applicants whose business model will benefit their community directly, either by providing jobs or bringing needed services to an underserved area. Again, the maximum amount is $5 million.
- Disaster Assistance: under this program, loans are sanctioned to renters or homeowners with a low-interest, long-term plan for the restoration of property to its pre-disaster condition.
In most cases, maintaining a good business credit report is enough to qualify. In addition, it instills confidence not only in the lender, but also in you. There is at least one SBA office in every state in America. If you contact them regarding the startup status of your business model and plan, you can get started on a government small business loan that will give you the financing to make your dreams a reality.
Beyond the Bank Loan: 6 Alternative Financing Methods for Startups, financing a business.#Financing #a
Beyond the Bank Loan: 6 Alternative Financing Methods for Startups
Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start it. Brand-new businesses are often turned down for bank loans, and even if your business is established, funds can still be tough to secure. Loans funded by the Small Business Administration are usually more accessible, but they are becoming increasingly competitive.
So what options are left for someone aspiring to be a small business owner? Here are six options beyond bank loans for financing your startup.
Online lenders have become a popular alternative to traditional business loans. These platforms have the advantage of speed, as an application takes only about an hour to complete, and the decision and accompanying funds can be issued within days. Because of the ease and quickness of online lending, economist and former U.S. Treasury Secretary Larry Summers said at the 2015 Lend It conference that he expects online lenders to eventually reach more than 70 percent of small businesses.
Editor s note: Are you considering a small business loan for your business? If you re looking for information to help you choose the one that s right for you, use the questionnaire below to have our sister site BuyerZone provide you with information from a variety of vendors for free:
Angel investors invest in early-stage or startup companies in exchange for a 20 to 25 percent return on their investment. They have helped to start up many prominent companies, including Google and Costco. Mark DiSalvo, CEO of private equity fund provider Semaphore said, You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in.
Find out what makes angel investors fund a business here.
Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company frequently.
Brian Haughey, assistant professor of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to entrepreneurs on whether the product will be successful or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window, he said.
Learn more about venture capital here.
Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled the bill. This way, the business can grow by providing the funds necessary to keep it going while waiting for customers to pay for outstanding invoices.
Eyal Shinar, CEO of small business cash flow management company Fundbox, says these advances allow companies to close the pay gap between billed work and payments to suppliers and contractors.
By closing the pay gap, companies can accept new projects more quickly, Shinar told Business News Daily. Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow.
Visit BND s guide to choosing a factoring service here.
Crowdfunding on sites such as Kickstarter and Indiegogo can give a boost to financing a small business. These sites allow businesses to pool small investments from a number of investors instead of having to look for a single investment.
Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal in order to keep any of the money raised.
Check out some emerging trends in crowdfunding here.
Businesses focused on science or research may be able to get grants from the government. The SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Recipients of these grants are required to meet federal research-and-development goals, and have a high potential for commercialization.
Learn more about applying for a small business grant here.
Additional reporting by Katherine Arline and Nicole Taylor. Some source interviews were conducted for a previous version of this article.
Jennifer Post graduated from Rowan University in 2012 with a Bachelor s Degree in Journalism. Having worked in the food industry, print and online journalism, and marketing, she is now a freelance contributor for Business News Daily. When she s not working, you will find her exploring her current town of Cape May, NJ or binge watching Pretty Little Liars for the 700th time.
financing for business
- Business Financing
CEI and its subsidiaries offer business and project financing and technical support for a wide range of small business, community facilities, renewable energy, affordable housing and mixed used real estate projects and ventures. With flexible business financing, loans, investments, rates and terms, CEI is able to leverage its capital with banks and other sources.
Since its first major investment in 1979 in a value-added, community-owned fish processing facility in midcoast Maine, CEI has provided $1.27 billion to 2,649 businesses, natural resource industries, community facilities, and affordable housing in Maine, the Northeast, and throughout rural America, leveraging over $2.55 billion in high impact, job-creating and sustainable economic development projects and enterprises.
CEI financing opportunities include:
- Direct loans to start-up, existing and growing small businesses in Maine and beyond, in amounts ranging from $5,000 to $3,000,000. To view our business financing brochure, please click here.To obtain an application for a loan, please click here.
- Venture capital investments in small businesses located in New England and the mid-Atlantic region. Investments range from under $500,000 to over $1 million.
- New Markets Tax Credits are available for investments in targeted distressed communities in Maine, Northern New England, and upstate New York. Select projects with high 3E impact will be considered in other parts of the country. Tax credit investments range from $2 million to $30 million.
- Affordable Homeownership, Rental and Supported Housing with loans and development capital from under $500,000 to over $2 million.
- Solar project investments in communities with low to moderate incomes, providing good jobs and clean energy
Find out more by calling 207-504-5900.
Startup Business Financing
Wouldn t you love to have a few million dollars to start your business? Me too! With a great idea and a great business plan, you probably feel almost entitled to get the funding you re seeking.
The reality, though, is that for most entrepreneurs, you must prove your concept first before anyone will put up that kind of money. But most businesses require some sort of initial capital for things like inventory, marketing, physical facilities, incorporation expenses, etc.
According to the U.S. Small Business Administration (SBA), While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Sometimes it comes down to simple cash flow–many companies have closed their doors because they just couldn t make it another few months until the money came in.
When exploring your funding options, there are several factors to consider:
- Are your needs short-term or long-term? How quickly will you be able to pay back the loan or provide a return on their investment?
- Is the money for operating expenses or for capital expenditures that will become assets, such as equipment or real estate?
- Do you need all the money now or in smaller pieces over several months?
- Are you willing to assume all the risk if your company doesn t succeed, or do you want someone to share the risk?
The answers to these questions will help you prioritize the many funding options available.
- Debt financing – You borrow the money and agree to pay it back in a particular time frame at a set interest rate. You owe the money whether your venture succeeds or not. Bank loans are what most people typically think of as debt financing, but we will explore many other options below.
- Equity financing – You sell partial ownership of your company in exchange for cash. The investors assume all (or most) of the risk–if the company fails, they lose their money. But if it succeeds, they typically make a much greater return on their investment than interest rates. In other words, equity financing is far more expensive if your company is successful, but far less expensive if it isn t.
Because investors take on a much higher risk than lenders, they are typically far more involved in your company. This can be a mixed blessing. They will likely offer advice and connections to help grow your business. But if their plan is to exit your company in 2-3 years with a substantial return on their investment, and your motivation is the long-term sustainable growth of the company, you may find yourself at odds with them as the company grows. Be careful not to give up too much control of your company.
Let s take a closer look at the many options available for startups.
Friends and family are still your best source for both loans and equity deals. They are typically less stringent regarding your credit and their expected return on investment. One caveat: structure the deal with the same legal rigor you would with anyone else or it may create problems down the road when you look for additional financing.
Prepare a business plan and formal documents–you ll both feel better, and it s good practice for later.
Credit cards are a great tool for cash flow management, assuming you use them just for that and not for long-term financing. Keep one or two cards with no balance on it and pay it off every month to give yourself a 30 to 60-day float with no interest. And the low introductory rates on some cards make them some of the cheapest money around. Managed well, they re extremely effective; managed poorly, they re extremely expensive.